Rev up the small-business engine

The G-20 must remember that credit is not the only fuel needed by this driver of economic recovery.

March 27, 2009

By the Monitor's Editorial Board

Next week, leaders of the Group of 20 nations will focus on big issues – more stimulus, more regulation, easier credit – to end a world recession. If they really want to create jobs, though, they need to think small, as in small business.

Small companies crank out jobs for workers and revenues for governments. They have produced 70 percent of net new American jobs over the last decade. Globally, 80 percent of governments take in a majority of their revenues from such enterprises.

"Economic recovery will be driven in large part by America's small businesses," the White House said in a statement last week – as it announced plans to increase access to government-backed loans to small businesses and reduce loan fees.

No doubt, the world's corner retailers and restaurateurs, suppliers and service companies depend on credit access to manage their cash flow and grow their businesses. Relieving the worldwide crunch on credit has to be a top priority for the G-20, which is made up of the world's leading industrialized and emerging markets.

But the G-20 must also be mindful that the road leading to start-ups and small-business recovery has to be paved with more than credit. Literally, it must consist of modern highways, rails, and ports that speed goods to market (the US has considerable catching up to do here). It must avoid the potholes of crime and corruption, which discourage business investment (ask Russia about this).

Investment in research and development encourages innovation that spawns new businesses. A G-20 country such as India is benefiting from this, though the US – with its geographic clusters of universities, businesses, and venture capital firms – is still the innovation leader. Meanwhile, flexibility in hiring and firing keeps small businesses nimble (France, take note).

Another factor is how much red tape an entrepreneur has to battle in order to turn an idea into a going concern, and keep it going. The World Bank, through the International Finance Corporation, actually tracks this battle.

Its latest survey, "Doing Business 2009," shows that governments are moving in the right direction, steadily removing unnecessary regulatory barriers.

Among the large emerging markets, China leads in red-tape reforms, making it easier to enforce contracts, pay taxes, and get credit.

But the gap between leaders and laggards is still wide. Among the G-20 countries, the US is at the top (No. 3 in the World Bank's survey of 181 countries), while Indonesia ranks near the bottom (No. 129).

Two countries that will be at the London meeting illustrate the growth that can come when governments clear regulatory weeds that choke start-ups.

In 2002, Mexico passed a law reducing the number of procedures required to start most kinds of business from 15 to 2. The result, according to a 2008 World Bank study, was a flow of new businesses that increased jobs by 2.8 percent.

Not long ago, Saudi Arabia required start-ups to have at least $100,000 in capital – the highest mandated level in the world. It recently abolished the requirement, and the number of start-ups nearly doubled.

Freeing up credit will help small businesses grow. But their health depends on so much more.

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